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Jess McCabe

The development rollercoaster (Inside Housing)

It was all going so well. Last June, we published with extra fanfare our league table ranking the housing associations which are developing the most homes:Inside Housing’s Top 50 Biggest Builders.

“If we were a [for-profit] business we would stop developing.”

Brendan Sarsfield, chief executive, Family Mosaic

We applauded as the number of homes built rose by 53% to just over 40,000 completions in the 2014/15 financial year. We called it “the tipping point”, as the sector vehemently protested media criticism it was building too few homes.

But a tipping point is by its nature precarious; you might be carried forward to reach new heights. Or you might roll backwards with a sickening plunge.

And only a couple of weeks later, the government used its summer Budget to give housing associations a jarring shove.

One after another the policies came, hitting the financial security of English housing associations. There was the 1% rent cut, squeezing returns from existing and future affordable housing. There was the voluntary Right to Buy, which raised the prospect of having to replace lost stock. And then the government changed tracks, with grant to be pushed into homeownership instead of affordable rent.

Landlords reacted with shock. The National Housing Federation (NHF) warned of a 27,000 cut in the number of homes built. Brendan Sarsfield, chief executive of Family Mosaic, told Inside Housing: “If we were a [for-profit] business we would stop developing.”

But that was in the immediate aftermath of the rent cut. Nine months on, is the picture as bad as everyone expected? To find out, we went back to our Top 50 of 2015 for updated data – particularly the Top 50 by pipeline, the housing associations with the biggest expectations for completion in 2015/16.

What we found was surprising. We expected housing association development to derail – fulfilling the sector’s worst fears. But instead the pipeline of homes to be built by 2020 has risen by more than 7,000 units.

Short-term loss of supply

In the short-term, we do see a decline. Fewer homes will be built in the 2015/16 financial year than previously planned. To get specific, the number of homes to be completed by the 50 housing associations with the biggest pipelines has dropped 6% in just over six months.

Back in June 2015, the Top 50 by pipeline planned to complete 34,526 homes this financial year. But when we asked the same landlords the same question today, the number had dropped to 32,462. This bears out landlords putting development on hold as they calculated the impact of the rent cut and other policies.

“The major outcome has seen both a reduction in planned development and has moved a quantum of projects into later years.”

John McManus, head of programme and performance, East Thames

A full 60% of the Top 50 by pipeline cut their projected completions for this year, while 40% cut starts.

Many of the cuts are aggressive, and the impact on housing supply will be immediate, shaking up the rankings in our league table.

East Thames, for example, will complete only a third of the homes it expected to in 2015/16, and has chopped 575 homes from its pipeline to 2020, from 2,250 to 1,675. Last spring it was in the middle of our pipeline league table, but it has now dropped to last place.

John McManus, head of programme and performance at the 15,000-home landlord, says this is a direct consequence of the 1% rent cut.

“The major outcome has seen both a reduction in planned development and has moved a quantum of projects into later years,” he explains.

For others, this year is a temporary blip.

Together Housing Group has chopped its delivery in 2015/16 in half, but a spokesperson describes this as a “slow down”. “There will be some schemes which are too far beyond viability parameters,” says the spokesperson, but most of its 2015/18 programme will be built eventually.

This isn’t the full story though. Sixteen out of our 50 associations increased the number of homes they will complete in 2015/16 compared to their earlier plans – in some cases, dramatically. Riverside is a prime example, having upped its expected completions this year by a startling 57% to 796. The 53,000-home landlord has also expanded its plans to build up to 2020 by nearly a quarter.

“We’re not immune to announcements.”

Mark Patchitt, director of development and growth, Riverside

Mark Patchitt, director of development and growth at Riverside, explains that the increase is partly due to winning a big older people’s scheme contract.

But the landlord has also made several changes to its development plans. Riverside has been maxing out the number of homes it can build on existing and new sites.

It boosted market sales and its shared ownership programme – which now make up nearly 50% of its pipeline – to cross-subsidise affordable housing and make it less reliant on grant, which increases the total number of homes it will build.

Riverside is also a pilot for the voluntary Right to Buy, and is projecting that tenants will buy between 200 and 250 homes. “We’re expecting a significant impact from the Right to Buy. We now have to start gearing up,” Mr Patchitt notes. “We need to keep that capacity within the pipeline [to replace homes sold to tenants one-for-one]. It takes three years to get something on site.”

Still, it’s not all rosy. “The 1% cut didn’t help us at all. We’re no different to anyone else – we’re not immune to announcements,” adds Mr Patchitt.

And the landlord’s development programme could still be sent off the rails – if the government cuts housing benefit for supported housing to Local Housing Allowance levels. The landlord has already put 150 units of older people’s and supported housing on hold, and if this policy is imposed without mitigation, this would likely lead to further cuts.

Out to 2020

What will happen in the long run? It is here that the results confound expectation.

Far from shucking off thousands of homes, the Top 50 by pipeline will build another 7,377 more homes by the end of the decade than they expected to last spring. This brings the total to be built by the Top 50 to 175,819.

The number of starts by these landlords has also risen year on year from 27,636 in 2014/15 to an expected 33,791 in 2015/16, or 23%.

So where does that leave the prediction by the NHF last summer that the Budget would gouge a 27,000-home hole in associations’ development plans?

Adam Morton, policy leader at the NHF, says: “Despite a number of challenges over the past year, associations have revised their business plans and driven even greater efficiency in their organisations in order to retain their ambitious plans to keep building across a range of tenures.”

Some of the biggest players in the market have solidified and boosted their plans, particularly for 2018/20. 100,000-home Sanctuary, which built the most homes in 2014/15, has almost doubled its pipeline for this period to 3,462 homes (see table). Notting Hill, another big player, increased its own by nearly 60% since last June.

Circle is a smaller player in development, but increased its 2018/20 pipeline by a stunning 233%. And it expects the numbers will rise further if its planned merger with Affinity Sutton goes ahead. “We have the ambition to deliver 5,000 new homes annually, with 50,000 homes being built in the 10 years from 2019,” both associations told Inside Housing. “This is some 30,000 more homes than the planned output of the two individual groups. We would expect the new group to be one of the country’s largest house builders.”

But some of the increases are likely to be not as extreme as they appear at first glance. Longhurst Group has increased its 2018/20 plans by 1,635% to 850 homes – but it seems more likely that its plans have simply firmed up since last spring, when it told Inside Housing it was to build 49 homes in that period. In fact, this translates to building at roughly the same rate as this year, when Longhurst aims to complete 473 homes.

Hyde Group’s development ambitions have barely shifted. David Gannicott, Hyde’s group business development director, points out: “The UK is still facing a huge shortfall in the supply of new homes and we believe forward-thinking housing associations like Hyde have a crucial role to play.

Even 24,000-home Family Mosaic – whose chief executive warned of a shutdown in construction – has increased its pipeline for 2015/20 by 8.9%, to 4,546. “What we’ve been trying to do is push development as hard as we can without putting the company at risk,” Mr Sarsfield says. By making savings elsewhere to mitigate the rent cut, he believes the association will be able to meet its target of 1,000 homes a year.

But it can’t be ignored that some associations are cutting back their development programme dramatically. WDH has made a cut of 26% to 2018, and 62% for 2018/20.

It is worth a side note that not all the cuts can be attributed to government policy. Orbit, for example, is projecting an 11% rise in completions for 2015/18, then a 24% drop in its 2018/20 pipeline.

But Paul High, executive director of Orbit’s sales and development arm, says: “Recent policy changes have not had a significant impact on our pipeline, and we are seeing normal fluctuations as would be expected with long-term development programmes.”

The tenure gamble

The real long-term change may not be in the volume of homes at all – but a major shift in the type of homes that housing associations are building.

Of course, the government has made its policy direction clear: Starter Homes not affordable rent, low-cost homeownership not housing benefit. And housing associations are responding.

L&Q, which still has the biggest pipeline in the sector, is indicative. It already planned for its future development to be 50% affordable, 50% commercial. Now, it has adjusted this to 40% affordable, 60% commercial. And whereby the commercial homes were meant to be 50% private rented, 50% market sale, L&Q will now build more for sale and less for private rent.

“Part of that is making sure our developments are within our risk appetite,” says Jerome Geoghegan, group director of development.

Knightstone’s Ms Hughes adds: “We predict approximately 50% of our new affordable development programme will be made up of homeownership, reducing our rented development by circa 35%.”

Most are producing more for the market, to cross-subsidise affordable housing. Still, housing associations are alert to the potential risks. East Thames, which made the most aggressive cuts to its development pipeline this year, is one of those landlords which plans to rebalance the tenure of homes it is building.

“Should market forces not be conducive or further policy announcements impact, this will ultimately continue to decrease the number of rented homes and then shared ownership homes the group can deliver,” says Mr McManus from East Thames.

For housing associations such as Together Housing, in areas of low house prices, the shift in tenure is difficult to accomplish. A spokesperson says the association is “still reviewing how we respond to the government’s challenge to provide homeownership rather than rent, whereby our areas of operation are low value compared to those in the South East. This, coupled with higher levels of unemployment and fewer opportunities to secure a mortgage, will require a robust marketing review to assess the likely risk of unsold sale plots.”

We can also look at the tenure breakdown for starts this year, and see how it compares to last year (see pie charts).

Social rent has remained roughly the same since last June. But affordable rent housing has dived, from 45% of starts in 2014/15 to 37% of starts in 2015/16.

Still, the dice haven’t fallen where one might expect – in higher starts for private rent and market sale.

Only 14% of starts are for market sale. This is actually lower than the 15% of starts by the same housing associations in 2014/15.

Private rent has increased its share, but only from 4% to 6%.

But another category – low-cost homeownership – has shot up. With a rise from 21% to 26%, this is the most significant change in tenure mix.

None of these are yet Starter Homes. Several of the Top 50 told us they might consider them in future, however, perhaps as the Section 106 contributions for their private schemes.

It seems obvious that dramatic changes to tenure mix are further down the road.

Inside Housing will also publish a full ranking of the Top 50 of 2016 in July.